US Airways Brand Under Fire

The personal animosity generated by US Airways’ very public advances toward AMR Corp.’s American Airlines division and the union furor that preceded that action have obscured something very important that is about to occur in the U.S. airline industry: Regardless of who is involved, more consolidation is coming, and it will likely bring an end to US Airways.

Airline managers for years have espoused the benefits of consolidation, noting that the U.S. can support only a certain number of major airlines if the sector is to produce sustained profits. All manner of industries have already passed through the evolution with great success, the argument goes, so why not the airline business?

There are still opponents, but year after year of dramatic losses, compounding the effects of the Sept. 11, 2001, terrorist attacks, provided enough reason for the authorities, under the auspices of two divergent political ideologies, to grant the airlines their wish.

Decreasing Numbers

The number of airlines quickly started to dwindle, with the list of “big” international operators shrinking each year until we ended up with the current tally of four: United Airlines, Delta Air Lines, American Airlines and US Airways, with Southwest Airlines, as always, operating parallel to this group—unsurprisingly—through its own consolidation efforts.

It would be foolhardy to believe it will end there, given the lucrative benefits of consolidation, but it is not clear how the lineup will change.

If US Airways’ CEO Doug Parker has his way, he will repeat his achievement from 2005, when America West Airlines took control of US Airways as it was proceeding through its second Chapter 11 reorganization. This time, Parker has set his sights higher—he wants to take the helm of American Airlines, one of the world’s most recognizable airline brands.

Parker has generated a whirlwind of support from Wall Street and American’s own unionized workforce for this plan, as well as an army of new experts who have emerged from obscurity, although it is far from certain how loyal any of these supporters are. And there are too few publicly available details at the moment for Parker’s bid to pass a basic litmus test.

Only Solution

Despite the lack of clarity surrounding Parker’s plan, it is clear he had to make the move. AMR’s leadership team, which has been headed by Tom Horton since the day the airline filed for Chapter 11, may be dismissive of the US Airways proposal, but they also intended to participate in further industry consolidation, albeit on their terms.

Even before US Airways made its bid public, Horton was promoting the concept of a revived AMR emerging from the darkness of unprofitability to resume its rightful place as a leading global airline in charge of its destiny and forging a new industry dynamic that would include further link-ups.

A new AMR, however, would view US Airways with little interest. Indeed, a study commissioned several years ago by AMR concludes that it would be the least desirable partnership available. AMR’s attention instead is focused on the next tier of domestic airlines, with JetBlue Airways and Alaska Air Group as likely candidates, that could strengthen American in specific markets, the East or West Coast or the Caribbean, for instance. While those eyeing investment opportunities salivate at the idea, AMR could simply bolster its relationship with extensive code-shares (as it already has with Alaska) or the joint ventures it has developed with British Airways and Japan Airlines that closely mimic the antitrust immunization deals favored by Delta and United but without the financial and disclosure commitments that require regulatory approval.

Extensive code-shares or joint ventures could enable AMR to develop feeder routes across the U.S. with minimal investment while reinforcing its new partners’ networks with the sales support that only large operations can provide. And AMR could perhaps supply some reciprocal traffic from its own network and those of its trans-oceanic partners as well.

Another Option

In a perfect world, AMR could expand without the inconvenience or cost of combining disparate workforces while helping to limit the potential upheaval of new entrants pressuring those second-tier operators. And it would marginalize US Airways, which AMR believes has little scope for growth in its hub markets in Phoenix, Charlotte, N.C., and Philadelphia, and allow the remaining “Big Three” to build on a domestic capacity initiative started three years ago that has already boosted U.S. load factors to industry highs.

It is too early to say if either of these concepts could succeed, but if they do, the eventual demise of US Airways in its current form would be almost guaranteed. And if it does, it would behoove us all to remember that few people seemed to care.